English airs concerns over pre-funding

Thursday, April 26th 2001, 9:27PM

by Rob Hosking

National looks set to focus on the risks around the government's proposed superannuation fund.
Deputy leader and finance spokesman Bill English says the extent of the capital to be exported has not been made clear.

"Having a well functioning capital market in New Zealand is pretty important," says English. "And if the government is going to operate a device which sucks up taxpayers' cash and export it doesn't sound like it's going to help our local capital markets much - even if it does help fund managers."

Moreover, the Superannuation Bill, which is currently undergoing select committee hearings around the country, contains provisions for investment on a prudent commercial basis; "In a manner that is consistent with best portfolio management techniques," to use the phrase adopted by Minister of Finance Michael Cullen when he introduced the bill in Parliament last year.

"The problem with this is clear once anyone takes a look at the course of the world equity markets over the past 12 months or so," says English.

New Zealand's sharemarket wound up doing fairly well by doing nothing at all, yet had the fund been operating 12 months ago there is little doubt much of it would have been invested in offshore equities, particularly in the IT sector.

"That wouldn't look so clever at the moment," says English.

But that in turn illustrates the point National looks set to ram home in coming months, that is the pre-funded scheme is not as low risk as it is being sold to voters.

"This is a government which has never understood commercial risk - and never will, because they have no collective experience of it at all. They tend to believe the models, they think they represent the real world. And that means they believe you will make 9.7% cumulative returns year on year. But that's not going to happen."

And from the contents of the bill, and the advice released by the Treasury so far, it is not at all clear how the government of the day would deal with a year or more of negative returns.

"The papers prepared thus far touch on this issue but do not address in any greater depth," says English.

"The model assumes steady returns year on year. That's fine, that's precisely because it is a model. But if you have two to three bad years in a row that is clearly going to have a big fiscal impact on the government of the day. And we don't know how that is to be handled."

One thing the Treasury models are clearer on is that in the coming decade or so the New Zealand government is going to be in a position to build up assets with or without the superannuation fund.

"The first question is, do we want the government to build up those assets, and secondly, if so, what for? Is it to be for investing in overseas equities markets?

"We're all still getting to grips with this whole business of managing the government balance sheet, because this generation of politicians has never had to deal with that before."

The other major concern which National looks like hammering over coming months is one of process, and the potential for political interference in the fund.

The financial sector is clearly not going to oppose the policy, says English, for reasons possibly obvious and possibly not so obvious.

The obvious reason is that the fund looks set to be a boon for the whole industry. Less so though is a growing perception of how the government operates, he says.

"We are concerned that already the management of this has become politicised. There is a feeling in the industry that there is a beauty parade coming up when the bill is passed, and people don't want to reduce their chances.

"That's got less to do with the legislation itself and more to do with the way people perceive the government operating. That is if you criticise it, or its policy, then one way or another they're going to deal to you."

And that intensely politicised attitude to the operation of policy is one which National feels will spill over into the operation of the fund.

"Even if the fund is run at three degrees of separation the people running it will get any message the government wants to send them. Already you have the push from the Greens for an ethical investment policy and that is the area that is the most vulnerable to political influence."

Do you believe investment decisions made by the board of the Big Cullen Fund will be free of political interference?